A brief look at the Turkish economy ahead of early elections

Ahead of an election cycle in Turkey, eyes are once again on the economy with a key nuance. This time, the call for elections came when the Turkish Lira has been severely suffering due to various concerns amid a “too much talk but no real action” era. And the whole economy has been witnessing the natural results of the non-realization of some really crucial structural reforms.

Let’s have a brief look at what has recently happened.

The Turkish currency is down 15 percent against the dollar over this year. In such times, it may be better to have a small historic look. The lira was at around 3.52 last summer and was even at 3.8 early in March, just before Moody’s downgraded Turkey’s sovereign ratings to Ba2 from Ba1, citing a continued loss of institutional strength and the increased risk of an external shock given its wide current account deficit. In an unexpected move, Standard & Poor’s followed the line and cut its sovereign debt rating on Turkey further into junk territory on May 1, citing widening concern about the outlook for inflation amid a sell-off in the lira. During those days, the IMF issued a warning about an overheating trend in the Turkish economy, which grew 7.4 percent in 2017. These warnings have been underlining key things, which need to be considered thoroughly. I will come back to this point below.

And the lira, which along with Argentina’s peso has been at the heart of the recent storm amid a dollar rally, slipped toward 4.5 to the dollar early this week and hit a new low versus the euro on worries President Recep Tayyip Erdoğan will take more control of interest rates if he wins elections next month.

Let’s continue to go back to May 2013, when then-Fed President Ben Bernanke first mentioned the idea of gradually reducing or “tapering” the U.S. Central Bank’s monetary expansion. This started a big move of money back to the western markets from emerging markets. That day, the lira weakened against the dollar, touching 1.8590.

Something needed to change for the emerging markets, including Turkey. It would be naïve to say Turkey did its best to prepare itself for the new era. It cut its foreign borrowing a bit, but it is still high. Additionally, Turkey’s foreign currency reserves are still not big enough to overcome this widespread financial change.

Rather than preparing itself for the storm even before 2013 and taking steps to strengthen its production system or increasing its labor productivity and the quality of education, Ankara started to take odd steps, such as giving too much emphasis on some sectors, mainly construction, or giving a huge boost to domestic consumption. The bigger hit the lira got, the higher inflation rate the country started to face. The more the top officials announced their enmity toward interest rates, the bigger hit the Turkish currency got, creating a fatal cycle. At the same time, the debt levels of the private sector and households soared.

A resurgent dollar, rising oil prices and a jump in borrowing costs have now caused havoc for Turkey, which is now among the worst affected due to its a gaping current account deficit, inflation rate and growing puzzlement over who exactly holds the reins of economic policies. The country’s 12-month current account gap already reached $55.4 billion in March and we fear a further rise in the wake of a rise in global oil prices.

If Turkey wants to attract more money, the rational things it needs to be are quite clear: It must increase its predictability, raise its labor productivity and the quality of its education system and take steps to increase its institutional strength.

Turkey did really well after the 2001 crisis by taking the required steps. That period until 2008 and even 2009 was difficult for people and companies but it gave fruits. For instance, the country lured a record-high FDI in 2007 at around $22 billion, followed by $19.8 billion in FDI in 2008. The FDI inflow was around $11 billion last year. Unfortunately, there has been too much talk but little action on the economic side for the last couple of years. Some unorthodox theories and complicated policies have now been negatively affecting the country’s future. Such steps will bring no good but the outflow of local and foreign investors.